Login
ISCOVER
We need to “heed the lessons” from the United States, Canada, the United Kingdom and New Zealand before attempting to ban trail commissions, a former MFAA president has warned.
According to Tim Brown, senior consultant at Our Broker, the broking division of real estate firm Raine & Horne, removing trail commission (as recommended by the Productivity Commission (PC)), would lift the costs of home lending.
To continue reading the rest of this article, please log in.
Looking for more benefits? Become a Premium Member.
Create free account to get unlimited news articles and more!
Looking for more benefits? Become a Premium Member.
Mr Brown, the former president of the Mortgage & Finance Association of Australia (MFAA) and former CEO of aggregator Vow Financial, made reference to the changes observed in foreign markets following the removal of trail commission from the broker remuneration model.
“I’ve travelled the world and have seen what happens when you remove trail commissions from brokers’ remuneration,” the senior consultant said.
“Trail commissions were removed in Canada. Now, upfront commissions are 1.15 per cent in Canada, which is one of the highest in the world.”
Mr Brown added that in Canada, the United Kingdom and New Zealand, the removal of trail commission undermined market competition, increased churn and produced poorer consumer outcomes.
“The recent downturn in mortgage activity in Canada caused by the GFC [global financial crisis], the country’s five major banks were able to regain their monopoly as brokers were forced to look elsewhere for work,” Mr Brown continued.
“The demise of trails in the UK and New Zealand has also encouraged excessive mortgage churn levels as upfront fees have incentivised brokers to refinance their clients into home loans that are often not in their best interests.
“In an upfront fee environment, the banks play a part in this charade, too, by giving away carrots such as TVs and holidays to attract clients from their competitors.
“We all know it’s the consumers who ultimately pay for these marketing sweeteners in the form of higher rates,” he said.
Further, the 39-year veteran of the finance industry noted that trail commissions incentivise good behaviour in the broking industry.
“Before the GFC in the US, there was a surge in mortgage brokers remunerated through upfront fees,” the senior consultant said.
“The post-GFC credit industry fuelled the wrong behaviour among some from the finance industry. Unfortunately, there was no recourse to the incomes of brokers who committed fraud as they were all paid up front.
“Trails are long-term incentives that ensure Australian brokers can stay in business and support clients when in need of debt advice.
“If anything, we should be encouraging higher trails and fewer upfront fees to support more of the right behaviour.”
Mr Brown urged policymakers to consider such case studies before proceeding with a ban on trail commission payments.
“I’d be urging the Productivity Commission to be careful about what it wishes for, and we need to heed the lessons from other OECD nations such as the US, Canada, Britain and New Zealand when decisions were taken to remove trailing commissions,” the senior consultant said.
[Related: Strong broking industry ‘fundamental’ to competition: Bank CEO]
